A firm is considering two mutually exclusive projects with the following cash flows: Project X Project Y
Year 1 $ 40,000 $120,000
Year 2 80,000 80,000
Year 3 120,000 40,000
Each project requires an investment of $100,000. The cost of capital is 10 percent.
Which project will have the higher net present value?

Question

Quizplus · Accepted Answer

To calculate net present value, we need to discount the cash flows at the cost of capital (10%). The present value of each cash flow for Project X is: Year 1 = $36,364, Year 2 = $66,116, and Year 3 = $86,382. The sum of these present values is $188,862. The present value of each cash flow for Project Y is: Year 1 = $109,091, Year 2 = $59,504, and Year 3 = $31,936. The sum of these present values is $200,531. Therefore, Project Y has a higher net present value and is the better choice.

A Firm Is Considering Two Mutually Exclusive Projects with the Following